What advantages does price discrimination have over the using the same price for everyone?


7

I'm trying to decide whether to change my pricing scheme from 'the same price for everyone' to 'a different price depending on which customer you are' (price discrimination / price differentiation). What advantages / disadvantages does this offer me?

Pricing Marketing Sales Business

asked Mar 4 '11 at 20:13
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Steven
1 point
Top digital marketing agency for SEO, content marketing, and PR: Demand Roll
  • You need to clarify your question. I suspect you're asking if it's OK to charge different customers a different price for the same good. A little detail for the context and the nature of the decision that will be informed by the answers would go a long way! – Jeremy Parsons 9 years ago
  • I was trying to edit this question to say just that before answering but kept getting an error. Thanks for that! – Nikolay Piryankov 9 years ago
  • Geographic Price Discrimination – Steven 9 years ago
  • Are you talking about services or products? When you say geographic discrmination, do you mean from country to country (USA vs Kenya), or from state to state (NY vs Kansas). – A. Garcia 9 years ago

5 Answers


5

Our business uses geographic price discrimination whereby our prices are different in one country compared to another. In economic terms we are maximising our profit by considering the different suppy & demand curves of our various markets.

The reason why we can do this is because it is not easy for a customer from one country to purchase our product from another and this is one of the necessary conditions required for price discrimination.

Goods that are perishable can easily be price discriminated across countries (which is why McDonalds burgers cost different prices in different countries) but commodities that can be easily traded, like gold, tend to have the same price everywhere.

Disadvantages Some companies, such as Amazon, have tried price discriminating based on demographic data (thereby selling products at higher prices to more well-off clients and at lower prices to less well-off clients). This received a lot of negative publicity and I believe Amazon no longer use this policy.

A further disadvantage is the opportunity for people to "trick" you by finding a way to purchase the cheapest products - for example, because laptops/PCs are cheaper in the US than they are in the UK, some people have earned money by buying them in the US and then selling them on ebay into the UK.

Advantages On the other hand, sometimes price discrimination is socially beneficial. For example, if a company offers cheaper products/services to students, children and the eldery, they can still maximise profits while providing a social benefit.

If you have the credibility to maintain a price
discrimination strategy, it is possible to increase profitability. Successful
price discrimination provides the
opportunity to increase your revenue
by selling to segments of the market
that may not have been willing to
purchase before - therefore increasing
your profits as well.

More on this here. (Wikipedia link)
answered Mar 4 '11 at 21:57
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Nikolay Piryankov
683 points

1

This is a pretty big question. Let me give a few pointers.

Firstly, very few businesses genuinely charge the same price for the same good to all customers everywhere, and there are good reasons for that. For instance,

  • Different customers perceive or experience different value from the same good
  • Price friction for new/prospective new customers (or new geographies) is different than that for established customers
  • The competitive landscape may vary, and one price may not fit all contexts
  • Discounting is the norm with some categories of product and some groups of buyer
  • In the most competitive markets where price can draw close to cost, costs vary
  • Singleton pricing makes you a sitting target
  • A great many forms of price discrimination can be made 'natural' simply by smart description or appealing to people's experiences (for instance that more can be cheaper in unit price terms, or more features will be more expensive)
  • Certain powerful triggers (e.g. limited offer, the price/quality expectation, "free," market comparison etc) are only available with price discrimination

Conversely, some businesses do indeed charge the same price for the same good to all (or the overwhelming majority) of customers. There are good reasons for that, especially:

  • Regulation (especially in the case of utilities)
  • Operational simplicity

However, it's definitely the case that in a world where we expect most goods to be at least visible online, generally available online, and sometimes only existing online, the complexity of managing multiple, complex pricing schemes can be very high. But conversely, the cost of managing multiple propositions constructed from the identical elements, and even multiple brands, can be very low.

So in a great many cases where apparently you are looking at uniform pricing, that may not be the full story. Or you may already have overlooked ways in which price is far from uniform, simply because they have been well-presented. (Or it may feel that the difference is based on something fundamental - for instance, geographic price discrimination across currency boundaries but using more than simply inter-currency rate variation is extremely prevalent.)

It's often a mistake to focus on the largest, most powerful organisations when looking at pricing. However, I think many businesses could learn a lot about how to segment price offerings by examining how Amazon integrates (and in what ways it limits integration of) Marketplace vendors, looked at through a pure pricing lens.

As a final comment, the jargon itself has an effect on decision-making. "Price discrimination" can sound shady, simply because that word 'discrimination' has shifted balance, and we most often hear it in situations where it has negative connotations.

answered Mar 10 '11 at 02:51
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Jeremy Parsons
5,197 points

1

Joels answer on this is still great. It's specifically about software but works for other branches too.

answered Mar 6 '11 at 00:51
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Carra
111 points
  • Awesome article. – A. Garcia 9 years ago

1

Is this a web startup? I wouldn't do geographic price discrimination if it is. The cost a servicing a customer anywhere around the world is almost a mute point now.

There are much more effective ways you can charge different amounts to different customers

  • Offer free services to people who refer business to you. A customer who is an evangelist should be rewarded over someone who is not.
  • Charge for customer support - If a customer is taking up a lot of your time on the phone (and refuses to use your email support system), you might want to charge them.
  • Customers who require more customization can be charged more for the added integration
answered Mar 7 '11 at 09:52
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Andy Cook
2,309 points

0

If you are talking about services, price discrimination may be a good idea as long as you can clearly justify why you are chargin a different price: you could argue geographic differences, taxation, but more importantly you could simply say that the service you provided to Mr Smith in, say, New York, is not exactly the same service you provided to Mr Sixpack in, say, Kansas or Nepal (less days or number of hours billed,...).

If you are talking about a product, then things get a bit trickier. Clients can get really mad if they find out about your little price discrimination (the term itself has a horrible negative connotation). A Mercedes S300 is a the same in China or in Russia. You could try to justify your pricing strategy arguing that tariffs are different from country to country, VAT, transport, logistics, warehousing expenses,...

It would be useful if you clarified whether you intend to discriminate upwards or downwards and by how much.

Good luck!

answered Mar 10 '11 at 03:42
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A. Garcia
1,601 points

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